Note: For all strategies except GCP, Performance data shown is net of fixed fees and expenses charged till September 30th, 2024 and is net of annual performance fees (Except for Little Champs Portfolio) charged for client accounts whose account anniversary/performance calculation date falls upto the last date of this performance period. Since, for Little Champs Portfolio, performances fees are charged on cumulative gains at the third anniversary, of the respective client account, the effect of the same has been incorporated for client accounts whose third account anniversary falls upto the last date of this performance period. Performance data is not verified either by Securities and Exchange Board of India or U.S. Securities and Exchange Commission.

For GCP, performance data is shown gross of taxes and net of fees & expenses charged till end of last month on client account. Returns more than 1 year are annualized. GCP USD returns are converted into INR using exchange rate published by RBI. Source: https://www.rbi.org.in/scripts/ReferenceRateArchive.aspx

The calculation or presentation of performance results in this publication has NOT been approved or reviewed by the IFSCA or SEC. Performance is the combined performance of RI and NRI strategies.

*For relative performance of particular Investment Approach to other Portfolio Managers within the selected strategy, please refer https://www.apmiindia.org/apmi/WSIAConsolidateReport.htm?action=showReportMenu Under PMS Provider Name please select Marcellus Investment Managers Private Limited and select your Investment Approach Name for viewing the stated disclosure.

Note: APMI provides performance data of Portfolio Managers managing domestic strategies only. Hence, GCP is excluded.

Consistent Compounders Portfolio (CCP)

2QFY25 results for the broader Indian stock market suggest a broad-based slowdown in the Indian economy. 34 Nifty-50 companies reported results in the month of October and their net income increased by only -1% YoY. Amidst this slowdown in broader corporate earnings growth, we expect healthy earnings growth from CCP portfolio companies, which should continue to reflect in their share price performance in future.

From a long term perspective, ‘capitalism without capital’, i.e., the growing prominence of companies who are plays on intellectual rather than physical assets, is now increasingly prominent amongst Indian companies. Marcellus’ CCP portfolio is actively participating in this theme – over the past 5 years, profits of companies in our current CCP portfolio have grown at a significantly faster pace (31% PAT CAGR) compared to their fixed assets (16% Fixed Asset CAGR) on a weighted average basis. Intangible or intellectual assets provide advantages around: a) ‘Scale’ – e.g. Narayana’s tech stack; b) Spillovers – e.g. Trent’s differentiated procurement architecture that was built for Westside, but was leveraged by Zudio; and c) Synergies – e.g. CMS Infosystem’s multiple intangible assets collectively produce even higher returns than what they would produce individually. Finally, faster profit growth compared to fixed asset growth leads to accelerated cash flow generation, which is reinvested by enterprising compounders to build optionalities, thereby augmenting overall revenue growth in future.

Exhibit: Over the past 5 years, profits of companies in our current CCP portfolio have grown at a significantly faster pace compared to their fixed assets

Global Compounders (GCP)

We have not made any changes in the portfolio since June this year. October was a busy month, with significant U.S. election news and a wave of earnings reports. This drove some volatility, as the market anticipated earnings while attempting to predict the election outcome. Betting markets fluctuated, and it’s likely the election results are clear by the time this newsletter reaches you.

Source: 2024 National: Trump vs. Harris | RealClearPolling

In terms of performance, GCP underperformed the index by ~200bps for October, largely due to our limited exposure to Nvidia and disappointing earnings from a few holdings. This level of volatility is not uncommon during earnings season and major events like the U.S. election.

It might be worth highlighting few of the portfolio company earnings that were big movers around and post earnings – it was a mixed bag:

Taiwan Semiconductor (TSMC): Very positive set of numbers, TSMC’s Q3 FY24 results underscored its dominance, with $23.5 billion in revenue (up 36% year-over-year), driven by high-performance computing (51% of revenue) and smartphones (34%). With a ~58% gross margin, TSMC achieved $13.6 billion in gross profit, resulting in an operating profit of $11.2 billion (47%+ margin) and a net profit of $10.1 billion (~43% margin). TSMC kept expenses tightly controlled, investing $1.6 billion in R&D and $2.4 billion in operations, reinforcing its commitment to innovation and leadership. Leading 3nm and 5nm production, TSMC has captured major AI, HPC, and automotive market share, leaving Intel and Samsung trailing as they grapple with delays and yield issues. With fully ramped 3nm production and a clear 2nm roadmap by 2025, TSMC has solidified its position as the frontrunner in a tech-driven race where speed and precision are key. It is our largest position in the semiconductor space – hence it was comforting to see the thesis in place.

ASML:   ASML’s quarterly results were fine, but the outlook was challenging – unlike that of TSMC’s. ASML’s Q3 results showed robust revenue of EUR 7.5 billion, up 20% sequentially and 12% year-over-year, with EBIT, EPS, and gross margins exceeding expectations. However, bookings missed by 51%, and management has revised its FY25 outlook, lowering net sales from €35 billion to €32.5 billion at midpoint, driven by fewer EUV orders and reduced sales in China. Gross margin guidance also dropped from 55% to 52%, reflecting a less favorable revenue mix and lower EUV sales. Despite these adjustments, ASML’s long-term outlook remains strong, with EUV expected to comprise most system sales in the coming years, up from 36% today. Although the recovery in non-AI segments will extend into 2025, ASML’s €36 billion order backlog highlights its market dominance and revenue visibility, exceeding the entire FY25 sales forecast. While we remain confident in ASML’s leadership in EUV lithography and long-term growth prospects, we were concerned on the cyclical downturn in ex AI exposure and potential order headwind from China (reflected in position sizing), ASML’s guidance was even below our lowered expectations. But the valuation looks compelling, and if there is some visibility around bottoming of orders/revenue expectations, this can be an interesting opportunity to add more.

IDEXX Laboratories: Broadly weak set of numbers and outlook. IDEXX reported a 6.6% YoY revenue growth in Q3 2024 (6.1% organic), affected by a decline in same-store clinical visits and pricing pressures. U.S. CAG Diagnostic growth was modest at 4.6%, with wellness visits down 3.4%, while international diagnostics grew 9% organically. Sales gains were mainly driven by ~5% price increases, though weaker U.S. pricing stemmed from contract renewals with large clients. However, IDEXX reduced its Q4 and FY guidance, citing weaker clinical visits and hurricane impacts. High inflation is reducing clinic visits, with diagnostic frequency and utilization unable to offset this trend. Reflecting on IDEXX’s outlook, we see room for improvement; our data checks with veterinarians indicated that staffing issues were resolving, yet we underestimated consumers’ discretionary approach to pet care spending amid stretched budgets. We’ll monitor shifts in spending behavior closely, but it’s clear we could have been more cautious in our projections.

AMETEK: Returned to its beat-and-raise form after a couple of underwhelming quarters. The company reported Q3 adjusted EPS of $1.66, surpassing both internal and Street estimates of $1.62, supported by strong segment operating profit. While EIG sales were relatively flat, EMG sales grew 18% with continued double-digit order growth. AMETEK’s free cash flow remained robust, and the company increased FY24 guidance to an EPS range of $6.77–6.82, above the Street’s estimate of $6.76. Additionally, AMETEK’s acquisition of Virtek Vision, a laser-based projection and inspection systems company, reflects its confidence in sustained growth and positions it for further expansion in its niche markets.

Reflecting on 2 Years of GCP

October also marks the GCP portfolio’s two-year anniversary. It’s been an eventful but rewarding journey, with the portfolio achieving an absolute CAGR of ~28% net of fees in INR terms, outperforming the benchmark by over 500bps. This is particularly notable given the highly concentrated nature of the U.S. market over the past two years, where a handful of mega-cap tech giants delivered the majority of returns, and we maintained limited exposure to this group. While it was challenging to miss out on Nvidia, our strong performance relative to the benchmark underscores the value of our strategy and the diligent work of our team.

The past two years have been filled with valuable lessons, and we’ve identified several areas for improvement that we will prioritize moving forward. We view this as an ongoing process as we continue to refine our approach and deliver on our commitment to investors.

Thank you, as always, for your continued trust in us!

Marcellus performance data is shown gross of taxes and net of fees and expenses charged until the end of last month. Performance fees are charged annually in December. Returns for periods longer than one year are annualized. Marcellus’ GCP USD returns are converted into INR using exchange rate published by RBI. Source: https://www.rbi.org.in/scripts/ReferenceRateArchive.aspx

‘Since Inception’ performance calculated from 31st Oct 2022. The inception date is 31st October 2022, being the next business day after the account got funded on 28th October 2022. S&P 500 net total return is calculated by considering both capital appreciation and dividend payouts.

The calculation or presentation of performance results in this publication has NOT been approved or reviewed by the IFSCA or SEC. Performance is the combined performance of RI and NRI strategies.

Kings of Capital Portfolio (KCP)

As Q2FY25 results for most large lenders have been reported in the past month, we can see slowdown in loan growth and signs of stress especially across microfinance and unsecured lending. The exuberance around growth and especially retail lending is appearing to die down as most lenders have sounded caution. For the first time post Covid, discussion has shifted from growth and margins to asset quality and risks. We believe KCP lenders stand to benefit in such an environment as the stress build up in KCP lenders has been significantly lower than the rest of the system. While we will discuss Q2FY25 earnings in greater detail in next months’ update, basis the results already published KCP portfolio earnings growth has held up better than the broader market. Specifically versus the lending universe, asset quality of KCP lenders has also been significantly better. This is visible in how the markets have penalised poor quality lenders over the past 3 to 6 months:

Nifty PSU Banks Index has corrected 13% from their peak
Smaller private banks have corrected 28% from their peak

Various types of SFBs have corrected 35% from their peak
Microfinance lenders have also corrected 50% from their peak

On the other hand, the big four private banks (all four large private banks are KCP holdings) and regional banks (City Union Bank is a KCP portfolio company) have held up well. As the market starts to further differentiate between lenders with high quality risk management and lower quality lenders, we believe KCP lenders will be a big beneficiary.

Also, our investments in in the insurance sector are better positioned as they are insulated from asset quality issues and a slowdown in loan growth for the banking sector. Further, we have reduced exposure to capital market plays given punchy valuations and a possibility of steep earning downgrades if the current market drawdown continues.

Given the current valuations of quality private sector lenders and the macro backdrop, we believe the KCP portfolio is well positioned for market share gains and continued outperformance versus the broader market.

Little Champs portfolio (LCP) and Rising Giants portfolio (RGP)

LCP and RGP portfolios continue on their path of turnaround in performance delivering net returns of 17.51% and 24.02% respectively from April 1, 2024 to October 31, 2024. This is attributable to:

  • An improvement in the earnings growth witnessed by the portfolios in the recent quarters (most of the portfolio companies are yet to report their latest quarter i.e. 2QFY25 earnings and hence we will be providing more clarity on this aspect in the next month’s update).
  • Portfolio changes through addition/retention of the stocks where we have high confidence of earnings delivery over the near-medium term; and
  • Aligning the allocation to the stocks proportional to the IRRs that are expected to be delivered, taking into consideration the earnings growth prospects and possible valuation re-rating/de-rating. To that extent, we have also exited from/trimmed positions in the stocks where the IRRs have come down significantly below the acceptable thresholds.

Whilst there has been some concern building around the performance of small-mid cap portfolios in the recent months, we remain sanguine about the relative prospects of the LCP and RGP portfolios driven by our confidence around the earnings outlook, healthy balance sheets and management quality of our portfolio stocks which has historically helped them exhibit high degree of resilience during periods of market drawdowns. We saw this playing out to some extent in the month of October 2024 where both the LCP and RGP portfolios outperformed their benchmarks amidst a weak return environment.

We continue to make suitable changes in the portfolio:

  • In the LCP portfolio with an aim to create more portfolio diversity and discovery; and
  • In the RGP portfolio, we have recently titled the portfolio more towards smaller market cap names where we see better valuation and scope for making higher IRRs than some of the large cap incumbents (which we have exited or trimmed positions in).

Additions to the Rising Giants PMS portfolio (as of October 31, 2024)

1. Grauer & Weil (India) Ltd.
Grauer and Weil (G&W) enjoys a strong moat in its core Electroplating Chemicals business around: the recipe of the chemicals (IP), customising the product to the requirements of the customer and providing customer service through Pan-India technical centres. Consequently, there are strong entry barriers/barriers to scale in the industry with G&W and Artek being the only 2 large Indian companies alongside a few MNC players. Moreover, G&W has created strong competitive edge through backward integration into engineering electroplating equipments as well to the in-house manufacturing of certain intermediates.

G&W has also developed a strong moat in the niche paints applications through R&D and is the No.1 player in the Oil & Gas Pipes segment and No.2 in the water pipes segment. In the Malls business, company has a unique locational advantage in the western suburbs of Kandivali (east) which lacks meaningful competition (though we could see some upcoming competition from a new Oberoi Mall).

While the Electroplating chemicals business is expected to grow in line with automotive/manufacturing industries, Paints business is expected to continue to grow at a faster pace. The Company is setting up a large R&D centre in Vasai which can help G&W to enter into newer segments and gain market share.

2. LT Foods Ltd.
In a seemingly commodity-like business of rice and rice products, LT Foods has been able to build a formidable franchise underpinned by:

  • A robust procurement supply chain architecture (digital investments, agri-extension team and long-standing commission agents) that has brought down the procurement costs and inventory days in a business that typically requires longer storage of inventory (due to ageing requirement of basmati rice).
  • Adoption of automation and industry first methods (Silo storages) that have enabled quality as well as yield improvement in the recent years.
  • Well-thought-out capital allocation decisions – foraying into USA, Europe in contrast with peers’ focus on much larger but challenging Middle East market. The promoters have displayed flexibility in ‘build vs buy’ to create a strong market presence in key export markets and bring diversity in the business model (such as foray into jasmine rice).

All of the above has culminated into a strong brand presence and market share across geographies with Industry leading revenue growth, margin and return ratios in the last 5 years.

We see further growth drivers for the business from:

· Rising consumption of Basmati given its health benefits (low glycaemic index) and premium positioning.

· Continual market share gains, especially in India (as channels formalise; shift from loose to packaged rice) and Europe (new greenfield in UK).

· Opportunity in the Middle East market through SALIC as a strategic investor.

· Opportunity in health and convenience segment.

3. Ultramarine & Pigments Ltd.
Ultramarine & Pigments’ core business consists of surfactants (~35% of EBITDA) and inorganic ultramarine blue pigments (~50% of EBITDA). In the surfactants division, Ultramarine is a relatively smaller player compared to peers like Godrej Industries and Galaxy Surfactants (nearly 9x the size of Ultramarine). However, Ultramarine is the largest surfactants player based in South India giving it strategic locational edge particularly amongst local FMCG players. Similarly, in the pigments segment, it is one of the top 5 inorganic Ultramarine Blue pigment manufacturers catering to industries such as plastic, paints etc. While there are a number of unorganised players in colour pigments, players like Ultramarine carry strong technical advantage in the form of high yield ratio, consistency in quality and solutions approach to customers.

4. MAS Financial Services Ltd.
MAS Financial is a Gujarat headquartered NBFC which lends to the SME and MSME segments via two models – (i) direct lending to MSMEs (with an average ticket size of Rs. 35,000) and to SMEs with an average ticket size of Rs. 37 lacs) and (ii) lending to NBFCs which further on lend to the SME & MSME segment, this constitutes 55-60% of the loan book. Its key strength lies in its unique business model of lending to NBFCs on the asset side and building the liability side by way of assignments, thereby enabling it to make large NIMs with NPAs of under 2%. MAS has a track record of consistent and profitable growth over the previous two decades, its loan book and PAT have grown at a CAGR of 16% over FY18-24. It has been able to maintain average NNPAs over FY18-24 at under 1.5% with an average RoE of 16.3% during the period.

5. Carysil Ltd.
Carysil started as a manufacturer of quartz sinks (FY24 – 51% revenue mix) & over time diversified into adjacencies like stainless steel sinks (13%), kitchen appliances/bath products (11%) & solid surface tops (25%). Carysil started with Quartz sink exports to Europe and US. Carysil’s customers are building material companies/retailers like IKEA, Grohe, B&Q, Menards, Lowe’s and Home Depot.

Quartz has been taking share from Stainless Steel sinks due to better aesthetics. We expect Quartz sink market to grow in double digits as it continues to take market share from Steel. Carysil makes quartz sinks through “Schock” technology. Globally there are only 4 companies which have this technology viz. Schock in Germany, Blanco in US, Franke in Switzerland, and Carysil in Asia. Schock technology and know-how serves as a strong moat for the company and acts as an entry barrier. Furthermore, out of the 4 players who have Schock technology, all except Carysil have plants in US or Europe and hence are at a cost disadvantage compared to Carysil. Overtime, the firm has expanded into adjacencies like premium stainless-steel sinks, quartz surface tops, kitchen appliances (hobs, wine chillers), sanitaryware & bath fittings.

Carysil has history of doing M&A to enter new geographies or new categories in UK & USA at attractive valuations. Revenue & PAT has grown at 22% CAGR and 27% CAGR over FY19-24.

On the other hand, we have exited from Info Edge (India) Ltd- InfoEdge share price has run-up by 82% in the twelve months ending 31st October 2024) – which meant that IRR expected on the stock has come down significantly. As a result, it was decided to exit from the stock.

Source: Respective company’s annual filings

Additions to the Little Champs PMS portfolio (as of October 31, 2024)

1. Grauer & Weil (India) Ltd.
Please refer the rationale provided above under the RGP additions

2. LT Foods Ltd.
Please refer the rationale provided above under the RGP additions

3. Narayana Hrudayalaya Ltd.
NH runs a chain of hospitals across India and in Cayman Islands. The corporate hospital industry in India is undergoing structural tailwinds due to: a) increase in health insurance penetration; and b) increase in awareness and early detection of diseases related to oncology and cardiology. Amidst these tailwinds, NH has built a hospital network in Bangalore, Kolkata, Delhi and few other parts of the country. NH has also built a hospital in Cayman Islands, which has scaled up operations and profitability significantly over the last 5 years.

Competitive advantages of NH centres around the following:

  • Multiple profit engines firing successfully (unlike other hospitals who have only single engines profitably firing) – Bangalore, Kolkata and Cayman with healthy ROCEs in each of these three geographies. Moreover, management has disclosed in its annual reports and quarterly conference calls that bulk of its future expected bedcount growth is likely to come these three geographies.
  • Relatively asset light + process efficiency orientation (medical device automation as well as opex automation through in-house software development e.g. Athma, Namah and Disha are some of the inhouse developed softwares). This helps maintain low ARPOBs compared to competition with high ROCEs, without having to pay ‘star-doctors’ significant remuneration packages.

Moats in Cayman:

  • Low doctor costs because doctors are supplied from India – rather than imported from the US;
  • Tie-ups with reputed institutions in medical sciences in the US; and
  • Covid forced Cayman’s local population to experience NH hospital for treatment.

4. Escorts Kubota Ltd.Inspite of the erstwhile promoters losing focus on the tractors business and being at the brink of bankruptcy, Escorts has still maintained its market share, thanks to its strong brand image and turnaround architected by Nikhil Nanda and team. With Kubota now controlling majority of the stake, we believe Escorts is at a cusp of gaining market share in the tractor industry because of the following reasons:

  • From FY20 to FY23, Escorts underwent a massive attrition (due to variety of reasons) and now the leadership team has stabilised.
  • After improving product quality, Kubota’s next target is to launch relevant products for the Indian market which helps to gain market share
  • Escorts is forming its own captive financing arm which is expected to be a market share booster.

Apart from the domestic market, Kubota intends to make India an export hub and export tractors to Africa, US and Europe markets.

Driven by market share gains and consequent operating leverage driven margin improvement. we expect the company to clock healthy earning growth over the next 5 years.

Source: Respective company’s annual filings